The technology sector has so far been trending downward with
disappointing earnings numbers from the big tech giants like
Intel (
INTC
)
and
International Business Machines (
IBM
)
. But the second quarter 2014 earnings beat from the software giant
-
Microsoft (
MSFT
)
- after the market closed yesterday has spread optimism across the
entire space (read:
Sluggish Intel Q4 Earnings Puts These ETFs in
Focus
).

Microsoft Results in Focus

The company reported earnings of 78 cents per share, outpacing the
Zacks Consensus Estimate of 68 cents and improving from the
year-ago earnings by 2 cents. Revenue grew 14% to a record $24.52
billion and outpaced our estimate of $23.49 billion. This
represents Microsoft's best performance in at least the last four
quarters.

Robust performances were largely credited to the surprise jump in
consumer hardware sales as demand for Xbox videogame console and
new Surface tablets gained traction during the holiday season.
Higher software sales such as Azure and Office 365 also led to the
strong revenue (read:
3 ETFs to Watch for Big Moves This Year
).

Growth in software and hardware revenue more than offset the steep
decline in personal computer sales. The company expects this trend
to continue in Q3 2014 and growth in Xbox and Surface tablets to
again drive revenue.

Microsoft is in the midst of implementing a reorganization and is
on the way to close its acquisition of $7.2 billion Nokia's mobile
phone business this quarter. The deal would strengthen the
competitive position and would add revenue streams and profit
opportunities for Microsoft. For example, Microsoft's gross margin
on the sale of one Nokia handset would increase from the current
$10 to $40 (read:
3 Tech ETFs to Watch on Microsoft-Nokia Deal
).

Further, Microsoft is still looking for a candidate who can replace
the current CEO - Steve Ballmer - who is expected to retire
sometime this year. The hunt for the new CEO will continue to be a
major story for Microsoft, at least for the near term.

Market Impact

Based on this solid earnings beat, Microsoft shares rose 3.5% in
after-market trading on Thursday. As such, the stock has a
potential to move upward in the coming few trading sessions.
However, the outlook still looks bleak given that MSFT has Zacks
Rank #4 (Sell) and a poor
Zacks Industry Rank
in the bottom 35% which suggests volatile trading ahead.

ETFs to Watch

The volatile trading in MSFT could create a good opportunity for
some investors who believe in the company's hardware and software
growth businesses. For those investors, we have highlighted three
tech ETFs having large allocation to this software giant that could
be in focus in coming days (see:
all the Technology ETFs here
):

This ETF tracks the Dow Jones US Technology Index, giving investors
exposure to 143 stocks. The fund has AUM of nearly $3.2 billion
while charging 45 bps in fees and expenses. Volume is good as it
exchanges more than 283,000 shares a day.

Microsoft occupies the third position in the basket with 9.19% of
assets. The portfolio is evenly split between technology hardware
and equipment, and software and computer services. The fund added
0.72% in the year-to-date period and has a Zacks ETF Rank of 2 or
'Buy' with a 'High' risk outlook.

This fund provides exposure to a large basket of 414 technology
stocks with AUM of $4.7 billion. This is done by tracking the MSCI
US Investable Market Information Technology 25/50 Index. The ETF
has 0.14% in expense ratio while volume is good (read:
Best ETF Strategies for 2014
).

Again here, MSFT is the third firm with 7.9% allocation. From a
sector perspective, Internet software & services and computer
hardware take the largest share with 16% each. VGT gained 0.63%
year-to-date and has a Zacks ETF Rank of 1 or 'Strong Buy' with a
'Low' risk outlook.

The most popular technology ETF on the market, XLK follows the
Technology Select Sector Index. This fund manages about $13.4
billion in asset base and trades in heavy volume of roughly 6.5
million.

The ETF charges 18 bps in fees per year from investors. In total,
the fund holds about 73 securities in its basket.

Of these firms, Microsoft takes the third spot, making up 7.84% of
the assets. In terms of industrial exposure, the fund is widely
spread across computer & peripherals, IT services, software and
Internet software & services that make up for double-digit
allocation. XLK is up 0.22% so far this year and has a Zacks ETF
Rank of 3 or 'Hold' with a 'Medium' risk outlook.